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The Narrowness of this Rally is Overstated

The Narrowness of this Rally is Overstated

June 15, 2023

Much has been said lately about the narrowness of this market, where 6 stocks are driving most of the gains this year, particularly in the QQQ. Things sure can appear that way at first glance.

For instance, even when looking at the broader S&P 500, which is now up just over 14% YTD, the S&P Equal Weight Index is flat for the year. Case closed, right?

Not so fast. What if things are being viewed incorrectly? Those top few companies are so big in terms of market cap, of course they’re going to have an outsized impact on the indices. This doesn’t necessarily mean this market rally is narrow, it may just mean we need to take different vantage point to get a sense of where things stand.

Instead, let’s look at some traditional growth sectors to see if other stocks are also winning:

  • Software (Represented by SPDR Software – XSW) – up over 20%
  • Semiconductors (SOXX) – up YTD over 42%
  • Building (ITB) – up 32%
  • Restaurants (EATZ) – up 16%

…so it isn’t just the big tech names that are showing returns for investors recently. Wins are being shared not only in other technology stocks, but in totally unrelated sectors, as well.

Furthering the case that this market’s advance is actually broadening, the Russell 2000 index (represented here by the exchange-traded fund, IWM), has broken out:

Since falling in February and March along with the rest of the market during the small bank scare, this small company index has made a series of higher breakouts recently. It still has to deal with its own February highs soon, which may pose a challenge, but the mere fact that this index is getting healthy actually argues against the idea this rally is narrow.

Again: to my eyes, the market's advance is broadening out.

I still prefer growth stocks vs. value, as I described recently, but investors should also feel free to look at sectors that have been underperforming. Even though they’re not my first choice, you might be able to find a hidden gem or two if this market continues to take an increasing number of stocks higher.